RBI chief for more small banks to serve SMEs

Reserve Bank of India (RBI) Governor Raghuram Rajan Tuesday said the central bank could give more chance to new players to open only small banks to fulfill local needs, including needs of small and medium enterprises (SMEs).

"The RBI can take more of a chance with new players if they get the licence to open only a small bank or to conduct only one segment of banking business," Rajan said at an event organised by the Competition Commission of India in New Delhi.

"Small banks tend to be better at catering to local needs, including needs of small and medium businesses. A payments bank, which will take deposits and offer payment and remittance services but be constrained to invest all its funds in safe instruments such as government securities, could be very synergistic with other existing services," he said.

Rajan said the RBI is planning to issue niche bank licences with restrictions on the geographical reach or products.

"Such differentiated licences - licences with restrictions on the geographical reach or the products offered by a new bank - can generate more organisational variety and efficiency," the governor added.

Rajan also said that RBI would soon announce a regular process of granting bank licences, ending the current system of giving it in tranches.

"The Reserve Bank of India is committed to freeing entry in banking," Rajan said.

"We just announced two new commercial bank licences after a rigorous vetting process. We are examining this experience, and after making appropriate changes, will announce a more regular process of giving licences - what has been termed licences on tap," the governor said.

The RBI issued in-principle licences to infrastructure financier IDFC and micro lender Bandhan in April. These firms were selected from over 25 applicants.

The RBI has asked IDFC and Bandhan to start operation within 18 months.

Currently the RBI issues licences in tranches under "window" system. The new system will pave the way for issuance of regular licences.